Is The STR Crash Real? 5 Years Of Actual Data

Curious what real numbers look like after five years running Short Term Rentals in this episode, I'll reveal the actual numbers from the last five years from one of my properties, one of my original properties, with a breakdown of the actual returns. Without leaving anything behind, Discuss some of the biggest supply increases in the nation and explore how those supply changes are affecting you. We'll offer some smart strategies to survive and thrive in today's market.

Welcome back to the Short Term Rental Riches podcast. I'm happy you're here again. We all know that across the nation and across the world we've seen some crazy, crazy changes in the amount of Airbnbs, the amount of short term rentals coming to the market. I've got some of those highlights for you. Today we're going to break down some of the top markets in the nation to fill you in on just how dramatic some of these supply increases have been and what that means for the actual revenue. At the end of the day, we're also going to dig into one of my properties and break down the actual numbers. And this isn't a market that has seen a crazy amount of supply. So let me just go ahead and get into it. I'm going to read off my list here. First of all, in a recent report from Air DNA, their projections for the rest of the year and going forward are that supply is basically tapered off where it was growing at 10, 15, 20% per year over the last few years. It's now just a little under 5% at 4.7% nationwide expected for 2025. Now even though that overall number is POS, it doesn't mean that all markets are actually growing. And so I've got a few of them for you right here. I'm going to go ahead and read off my list. The first one is Destin. So if we go back three years in Destin, Florida, which is a very popular vacation rental market, they had around 3,700 short term rental units on the market. Fast forward to today, 5,400. That's a 31% increase. While some markets are continuing to grow and some are pulling back, Dustin seems to sort of just be tapering off. So if you're already in that market, you can expect that not going to have more downward pressure on your prices in Phoenix. So really big city, right? If we go back to June 2022, they had 6,100 units roughly. Now they have more than double that, 15,200. Imagine what that does to your overall revenue. Sacramento, another popular market and one where I have properties as well. If we go way back To June of 2022, there's around 635 short term rental units there. Now I have this segmented out to the down town midtown area where my properties happen to be. Fast forward to today. 1400 properties, that is a 55% increase. Now a couple more popular tourist destinations. We have Gulf shores which grew from 9, 400 to 14, 800 as of this year, which is a 36% increase. They are however not continuing to grow, so they're sort of holding steady. And then lastly we have one market that's seen quite possibly the biggest amount of growth over the few years in of a popular tourist destination and that is Gatlinburg, Tennessee and it's gone from 8,700 units to 15,300 just in a few years. That's a 43% increase. Now if we look at the actual supply in this market, they're actually decreasing. So a lot of properties came on the market. What does that do to your overall prices and returns? Unfortunately, that brings it down. If demand is not staying equal and that's what we're seeing in this market, some of that supply is coming off the table. And that's also what we'll see in the market where I'm going to break down my actual numbers in Memphis, Tennessee. But before we do, I just want to cover a couple highlights or things that you might want to consider about big markets if you're looking to invest in short term rentals. The first thing is, is that if you are looking to invest in an urban type place, let's take Phoenix for example. It has a lot of units. Well, a lot of those units coming on the market are not vacation rentals. Right. Those were probably long term rentals. People saw the opportunity. They saw that they could earn more than they could as a short term rental. And of course they pull them over, which is going to be very similar to my setup in Memphis, Tennessee. And just as it was easier for them to convert to a short term rental, it's also a little easier for them to go back to a long term rental. So we can see the changes in these bigger cities happen on a faster pace. If you're buying $1 million or $3 million home in Destin, Florida for example, well, the buyer pool for that is not as big as a lower price point. So if you have a really expensive vacation rental, well, those just aren't going to move as fast, lower priced property. And there's also not as many backup plans for A designated vacation rental. Right. It's usually not going to make sense to convert that back to a long term rental. And so we'll see in these vacation rental markets that a lot of time the supply is not moving as quickly as it would in a larger city. So let's jump this Tennessee. I'm from California originally. That's where I started investing. But I started investing in Memphis in 2017 because I saw a lot of opportunity there and it really was a gold mine and it's been really great. It still is great to this day. But things have definitely changed. If we go all the way back five years, 2021, this property was earning around $157,000 a year. Now fast forward to today, a little over $200,000. Now this was right after Covid, right? Remember, everyone had been bottled up in their homes and looking to get out and money was just floating through the air because the government had printed so much money. And so you'll see this across the nation, across the world, that 2022 was this sort of anomaly that is prob again. And we'll see the following year that those numbers returned all the way back down to around 1560-0020-2415-2000 and year to date, 85,000. And if we look at the year to date numbers, I'm actually pacing ahead of where I was the years before. So I'm making more money this year. Now if we jump over to the supply, five years ago there was only around 287 units in this small little market that I've segmented out. This is Midtown Memphis, Tennessee. Fast forward 2024 last year. 718 units. That is a 60% increase in supply. Now you would imagine that that is really going to have a big impact on your revenue. And it has had an impact on my revenue, but not quite like the market. So the market in General's dropped about 18% in RevPAR. So that's your total ADR, your average daily rate multiplied by your occupancy rate. Meanwhile, mine has only dropped 2.6%. So there's a lot that go into that, right? A lot that we've talked about on this channel. Of course, having an active revenue management strategy, having great reviews, having great operations, all of those things can help. But the reality is my price dropped a lot. In fact, my ADR was actually down 14%. So that means my average daily price dropped 14%. Now, I know that doesn't feel good. I don't like lowering my prices. But the reality is that had I not dropped that average daily rate, I would very likely be along with the of the market and I would have made less money overall. And now I mentioned briefly there that I'm actually pacing ahead of last year. I'm planning on earning more with this property this year. And that is because supply has actually decreased now. It's gone down about 10% in this specific market. Again, this is an urban area, so a lot of people converted their long term rentals over and supply went way up. It grew by 60% and they realized, shoot, I am not making enough money to justify paying the utilities and all the additional operational expenses is I'm going back to a long term rental. That's very likely what happened. And for those of us sticking around in markets like these where the supply is decreasing, then you've got some really good opportunity ahead of you. All right, now let's get to the juicy stuff. How much did this property actually make? And I think that this part is going to surprise you. So last year, with roughly $152,000 in gross income. So that is before all expenses, it's, it netted so a net profit of almost $60,058,429. So that includes all the housekeeping I had, that includes all the operational expenses, the utilities, all of that. And that is a 38% profit margin. That is not too shabby. Right now this includes my principal pay down, not my cash flow. Right. So I had about another $30,000 of principal or a piece of this property that was paid off. If you want to think of it like that. Actual cash flow for the property was only about 30,000. To be exact, it was $28,768, which would be almost a 19% net cash flow margin. Right on the total gross revenue. Now you might be thinking, Tim, why are you going through all of that work? This is a multi unit building as well. There are multiple apartments here. Eight in fact. Now I know that sounds like a ton of work. Eight units with all the operations and you've only made $30,000 at the end of the year. Well, this is the nice part. We really have to look at our overall return, right? How much money have we invested into this property? Now I brought this property years ago. I spent over $200,000 renovating it, putting in furniture, all of those things to make it look nice as a short term rental. And then the best part about this property is that I increased the value of the property. I went back to the bank I did a cash out refinance and every single dollar that I invested into this property I got back. That means that I have an infinite return. I have zero dol dollars invest in this property and it's continuing to pay me tens of thousands of dollars each year. The forecast is looking good. It's looking like it's actually going to get even better because the supply is coming off the market. So these are my cash flow numbers, these are my margins on the property. But this actually doesn't account for the tax benefits that I've gotten from this property as well. So a recent appraisal on this property brought it in almost at a million dollars. I've already done a cost segregation study which allowed me to take bonus depreciation. It allowed me write off over $200,000 in income taxes. And so it's not just that I got this property for free. Of course there was a lot of work that went into it, right. So the money that I borrowed to pay for this property came from the bank. That's the most traditional way. So the first one is, is that you can use leverage, you can borrow other people's money, you can borrow money from the bank to buy a property. So that's the first piece, one of five. The second is that that you can rent this property out just like I am. And whether it's a short term rental guest or whether it's a long term guest, they're still paying down the principal on your property. And so in this specific property, my guests paid down about $30,000 over the course of last year. As you probably know, an amortized loan pays more interest upfront. And so the further you are into that loan, the more principal you pay. The third way that you can make money with real estate investing is through the tax advantages. So I mentioned the bonus depreciation. We've done episode on this already actually with Tom Wheelwright. Those were episodes 156, 157. For those of you that know, Tom Wheelwright is Robert Kiyosaki or the Rich Dad, Poor dad author's actual accountant. He really knows his stuff. So go back and check out those episodes and that'll help you learn a little bit more about this tax advantage if you didn't already know about it. The fourth way that we earn money with real estate is through cash flow. So I mentioned that I made around 156,000 last year and I, at the end of the year, after all those expenses was about $30,000 in cash flow. So after all the expenses, that's money that was coming right back into my pocket. And then the fifth way that we can earn money with real estate is through appreciation. Now, I don't like to bank on this. We never know what's going to happen in a market in the future. But I can say that this property is now worth a million dollars. And when I bought it, it was roughly $300,000. I had to put a lot of money into it, so I forced a lot of appreciation. But the market also gre.

So that's added a lot of equity to my overall portfolio. Now, of course, that money that I got back from that cash out refinance, I've used that to invest in lots of other properties along the way. So my overall portfolio has grown. And one of the nice things about having a larger portfolio is that if you have a year where you have higher expenses, you have to change the H vac or change the roof or something like that. Then you have more of a stable foundation. Right? If you have a lot of different properties, the chances of all the roofs going out at the same time is, is much likely. And the reserve that you need per property also goes down. If you want to find out more details about how I pulled all that money out of this particular property went back in my pocket, I used it for other properties. You can go to strictest.com where we have all of our episodes and this is episode number 85. Now I know a lot of you out there are in some of these markets that have seen a really big increase in supply. So I want to talk about some potential solutions to help you earn a little bit more with those properties. Some potential backup plans. If your short term rental is not earning as much as it used to or as much as you would like it to, you can evaluate whether it makes more sense to run it as a midterm rental. We've talked a lot about that on this channel. You do have less expenses, but your overall monthly rate is usually going to be less than what the short term rental rate would be. We also had another episode where we talked about pad split. This was a strategy where you don't rent your whole house or your whole vacation rental, but you actually rent out each room. And now I know that sounds really complicated. Sounds like way more operations. It could be a really good solution for you, especially if you're in a hard spot. That company pad split helps you coordinate and organize renting to multiple people, just like Airbnb would. If you rent by the room so you can use Both those options on the income side of things. Now remember our return on investment, there's two sides of it. We have all the income, but we also have all the expenses. And so if you cut your expenses, your overall returns going to go up. A couple things that you might consider. If your insurance has gone up a lot over the years and you have a thousand or a $2,500 deductible, well, consider increasing that to their maximum, maybe $10,000. Another thing that you can do on the expense side, and this could have a really big impact on your actual net income, is that if you're currently working with professional property manager and they're charging you 20, 30 or even more percent, well, consider taking it on yourself. We have tons of resources on this channel to help you do that. So if you're able to shave 20% off, you're very likely going to be a lot more profitable with your property. Now another solution is to a virtual property manager like our team at Coorsley. We've been doing this for a really long time. We charge an industry low rate and we also help our partners earn more than the market does traditionally. Just like my property that I went through in today's example. If you're interested in chatting with us, you can go to strict. Com, there's a little partner with us button there and we'd love to talk with you to see if it makes a good fit. Another thing that you could do is just improve your visibility with your property. There's not a lot of certainties with short term rentals, but one thing that is certain for sure is that the more you, your property is visible, the more demand there is for your property, the more likely it's going to earn money. So if you're not on all the channels, make sure you get on all the most important channels. Lastly, if you're in one of these markets where you're seeing the supply actually decrease, like the market where I have a lot of properties in Memphis, Tennessee. Well, hopefully you can hold on, right? Because if the supply is decreasing and the demand is not changing, then your income should start to go up just as I'm seeing with mine. The last thing you want to do is look at your real estate investment and ask yourself how well is this real estate investment doing compared to my other options? So if you were to invest the money that you had invested in the property in stocks, for example, you have way less control in stocks, right? It really is out of your hands. It's up to the market. It's Much more risky in my opinion. Not that you can't make money there, but you definitely don't have five ways to earn money from stocks like you do with real estate. If you were to put that money in a savings account, for example, at 3% or something like that, well, you're not doing very well there. Right? And if we look at your market, or really any, any market almost in the whole world, and we look the last five, 10, 20 years, do you know of a market 15 years ago that was worth less than it is now, or property that's worth less than is now? So if you can hold on, and especially if you're in a market where you're seeing supply decrease, well, I think you're going to be in a really good position. And again, if you're a high income earner and you can take advantage of the STR tax loophole by getting bonus depreciation to help offset your W2 income, well, then that alone could be enough tough reason for you to stick with your property or even buy more that aren't cash flowing. So there you go. There's a bit of a recap on one of my personal investments. Why I think real estate is still the best place to put your money. You want to make sure that you use a tool like AIR DNA to check the supply changes. Find out if supply is leaving your market or if it's still going up and up. Consider the whole investment equation, right? Are these tax benefits reason enough for you to invest in property? Hopefully they are. Do you have backup plans if the supply in your market has grown a lot? Do you have expenses that you haven't looked at reducing in a really long time? There are a lot of things that we can do both from the income and the expense side. And I hope this channel has helped you uncover some of those. Until next time, I hope you have a fabulous week.